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SILVER and gold prices rallied in London trade Tuesday morning, recovering half of yesterday's 1.7% and 3.1% drops as European stock markets also bounced with commodity prices.

The US Dollar eased back on the currency market, as did major government bond yields.

"The gold price [is] trad[ing] erratically without any clear direction," say London bullion dealers Standard Bank in their daily note, "due to residual concerns over the Fed's likely reduction in monetary stimulus, coupled with growing concerns over Chinese banking liquidity."

The People's Bank of China said today it has lent short-term money to some institutions to keep money-market interest rates at a "reasonable level" – its first statement of action since short-term rates in Shanghai jumped above 10% earlier this month.

"Our target for the move is $1155-1156, and there are no big levels of support between here and there."

After major bank analysts last week cut their
silver price forecasts, London bullion bank HSBC yesterday cut both its 2013 and 2014 gold price forecasts by 10%, down to $1396 and $1435 per ounce respectively.

"Clearly, recent market events show we did not cut [forecasts] enough" in previous revisions, HSBC added.

"This year has seen a significant change in fortunes for the gold market," says Deutsche, "driven by a turn in the US interest rate cycle, an increasingly bullish outlook for the US Dollar and a reallocation among global investors from fixed income into equities."

With foreign money being pulled from investments in India – the world's No.1 market for physical gold – the possible end of US quantitative easing "[is a] big negative for the Rupee as flows dwindle further," says Religare Capital Markets in a note from Mumbai.

Russian government debt today rallied from a sell-off which drove interest rates up to an 18-month high.

Russia added to its gold reserves for the 8th month running in May, new data from the International Monetary Fund showed Tuesday, taking it 996 tonnes – the 7th largest national hoard, ahead of Japan and behind Switzerland.

Gold buying by emerging-market central banks "is one of the underpinnings for gold in the long term," reckons ANZ analyst Victor Thianpiriya.

Amongst Asian households and investors, however, "There is only a slight improvement in demand right now due to the price drop," Reuters today quotes Dick Poon at German refining group Heraeus' Hong Kong office.

"It's definitely not up to April levels. Part of the reason is
weak seasonal [gold] demand. But economic factors and China growth are also hurting."

Longer-term says new analysis from Barclays bank, "The US cyclical position continues to look relatively healthy versus other developed market countries, where central banks are either in easing mode or are not expected to tighten policy any time soon."

"We expect the Dollar rally to broaden as the second half of 2013 progresses," writes the New York head of FX research at Barclays, Jose Wynne.

"Anybody who holds gold in Dollar terms," said trader and newsletter advisor Dennis Gartman to CNBC Monday, "finds himself in
a very uncomfortable position."

"Gold needs fuel, [it] needs monetary aggressiveness to push it up."

US Fed chairman Ben Bernanke said last week that the central bank may start 'tapering' its quantitative easing, and perhaps end the program by mid-2014.

Provided that inflation stays low and the US Dollar is strong, says Swiss bank UBS in a note, "Investors are likely to regard QE-insurance [meaning gold] as obsolete."

"You don't
walk up to a lion and flinch," said Dallas Fed president Richard Fisher in a speech in London on Monday, commenting on the sell-off in all asset classes following Fed chairman Bernanke's comments.

"Big money does organise itself somewhat like feral hogs," said Fisher. "If they detect a weakness or a bad scent, they'll go after it."

Fisher added, however, that the word "exit" is "not appropriate."

Speaking at a separate event Monday, non-voting Fed member Narayana Kocherlakota of the Minneapolis Fed said the US central bank "[has to]
hammer it every time we talk about policy" that interest rates will stay "highly accommodative...for a considerable time after the asset purchase program ends and the economic recovery strengthens" – a key phrase from recent Federal Reserve statements.

Although interest rates and central-bank asset purchases "must return to more normal conditions at some point," said outgoing Bank of England governor Mervyn King to the UK parliament today, "that point is not today."

The London Gold Market Report is the daily market review from BullionVault, the world's largest physical gold and silver market for private investors. A full member of professional trade body the London Bullion Market Association, BullionVault publishes the LGMR every day that the market is open, bringing you insider comment and analysis from the very center of the world's $240 billion-a-day physical gold trade, and putting the latest gold price action into its wider financial and economic context

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